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Employee continues working after rejecting unilateral reduction to compensation – acceptance or mitigation?

In order to remain viable in trying economic times, organizations may be required to implement cost-cutting measures.  These measures may include reductions to employee wages and benefits, or other fundamental changes to the terms and conditions of employment.  Needless to say, a significant body of case law relating to such unilateral changes by the employer has developed.

The good news is that employers are generally permitted to unilaterally change fundamental terms of the employment contract, provided they give reasonable notice of the change to the employee.  The bad news is that where an employee refuses to accept the change, the employer’s insistence on the new terms may be considered constructive dismissal.  Constructive dismissal is defined as a rejection by the employer of the contract of employment such that the employee is allowed to treat the contract as wrongfully terminated and seek notice damages.  But what happens when the employee rejects the change but nevertheless continues in his employment under the altered terms?  The Ontario Superior Court of Justice ruled on such a case in Russo v. Kerr (November 2010).

Lorenzo Russo, 53, had been employed as a warehouse manager for Kerr Bros. Ltd., a candy manufacturer, for 37 years.  In April 2009, when Kerr began experiencing financial difficulties, Mr. Russo was earning approximately $114,000 annually.  At that time, the new president of the company determined that Mr. Russo’s compensation was in excess of market rates and more than the company could afford.  He initiated a series of pay cuts, ultimately reducing Mr. Russo’s salary to $60,000.  Mr. Russo retained legal counsel and informed the employer, by way of letter, that he did not consent to the unilateral change to the terms of his employment and that he was being constructively dismissed.  After sending the letter, Mr. Russo continued to work for the employer in the same position, with the same duties, for the reduced pay.  He then sued Kerr for constructive dismissal, claiming notice damages of 28 months’ salary at his unreduced compensation level.

The employer admitted to the Court that it had constructively dismissed the employee. However it argued that Mr. Russo was required to either accept the dismissal and leave his employment, or accept the new terms of employment.  Since Mr. Russo continued in his employment, he must be deemed to have accepted the new terms of employment. 

On the other hand, Mr. Russo’s lawyer argued that Mr. Russo clearly rejected the new employment terms.  Mr. Russo continued his employment with Kerr only as a means of mitigating his damages.  Therefore Mr. Russo’s continued employment could not be construed as his acceptance of the salary reduction.  The issue facing the judge was whether Mr. Russo did in fact condone the changes to his employment and, if not, what would constitute reasonable notice.

WRONKO DECISION ON CONSTRUCTIVE DISMISSAL APPLIED

The judge applied the Ontario Court of Appeal’s decision in Wronko v. Western Inventory Services Ltd. (April 29, 2008) which discusses the options that an employee has when an employer unilaterally changes a fundamental term of the employment contract.  Readers of Focus may recall the Wronko decision, as it synthesized the earlier case law on constructive dismissal (see “Ontario Court of Appeal rules on an employer’s unilateral changes to the employment agreement – reasonable notice may not be enough”). 

In Wronko,the employee was given two years’ notice of a reduction in his severance pay.  Under the original terms of his employment, his severance pay was two years’ salary.  The employer sought to reduce this to three weeks’ pay for every year of service, up to a maximum of 30 weeks.  Every time the parties discussed this change, the employee clearly rejected the new severance provision.  When the two-year notice period passed, the employer insisted on the change.  The employee treated the employment contract as wrongfully terminated and sought notice damages of two years’ salary, based on the terms of the original employment contract. 

Wronko lost at the initial trial.  However, on appeal, Ontario’s top court upheld the original severance amount. It awarded Wronko two years’ salary.  In making the award, the Court of Appeal stated that when an employer unilaterally changes a fundamental term of the employment contract, an employee has three options:

• accept the change, and the employment will continue under the altered terms;
• reject the change, and sue for damages if the employer treats the relationship as subject to the new term (this constitutes constructive dismissal); or
• clearly reject the new term, in which case, in order to implement the change, the employer must terminate the employee with proper notice and offer re-employment on the new terms.

The Wronko decision therefore made it clear that should the employee refuse to accept the change to the employment contract, the employer must terminate the employment by proper notice, and then offer re-employment on the new terms.  Until the original contract is terminated, the employee is entitled to insist on its performance. 

The Court applied the Wronko decision to the case at hand. It found that Mr. Russo clearly communicated his rejection of the new terms to the employer.  The Court next considered the effect of Mr. Russo’s election to continue working at reduced pay.  As was noted above, the employer submitted that this should be interpreted as his acceptance of the pay cut.  But the Court disagreed.  In its view, Mr. Russo was entitled to elect to stay in the workplace, under the reduced terms, as a means of mitigating his damages: 

…the plaintiff [employee] can remain in the workplace under the changed terms as a means of mitigating his damages, but only for the period of reasonable notice.  If he elects to remain in the workplace under the changed terms beyond the period of reasonable notice, with the consent of the defendant [employer], it must then be concluded that he has accepted a new contract of employment under the changed terms after the expiry of the period of reasonable notice.

The Court went on to award Mr. Russo damages for the period of reasonable notice, deducting the income he earned while mitigating his damages.  Reasonable notice was set at 22 months, based on the Bardal factors (the nature of employment, length of service, age, availability of similar employment, and Kerr’s economic circumstances). 

In Our View

As in the Wronko decision, the Court in Russo made a point of discussing the options available to the employer after the compensation reduction was rejected by Mr. Russo.  It stated:

Once the defendant had been told that the plaintiff accepted that a constructive dismissal had occurred, and that he did not accept the new terms and conditions, the defendant could have told the plaintiff to leave the workplace.  Alternatively, the defendant could have kept the old terms and conditions in place for a period of reasonable notice.

The decisions in Wronko and Russo make it clear that if a unilateral change to a fundamental term of the employment contract is rejected by an employee, the employer must take additional action in order to implement the change.  In most cases this will be to terminate the employment on proper notice, and then to offer re-employment on the altered terms of employment.

or further information, please contact Andrew Tremayne at (613) 940-2736.